Escrow Agreements In EB-5: A help or a Hindrance?

As I listened, one caller seemed to have difficult time understanding that escrow agreements are not mandatory under EB-5 laws and regulations. She finally just said, thanks and stopped talking. It scares me that someone could become involved in EB-5 and still not grasp this small fact.

On the Q&A, someone had submitted the following:

"Setting up an escrow account is a standard way for RCs to receive investors' funds. Please confirm that for cases which are not affiliated with an RC that putting funds in an escrow account is permissible if all funds are committed to be released to the new commercial enterprise upon the approval of the individual's I-526."

My gut reactions to that were:

1.) Why would a stand-alone investor escrow his own funds?
2.) Why would a non-Regional Center EB-5 investor group need this arrangement? How did they meet? Are they strangers being hooked up like mail-order brides? That's a scary thought!
3.) Lastly, I guess that a foreign EB-5 investor could be joining with non-EB-5 foreign investors and/or domestic investors and might, in fact, be the "big money" investor in such a group and might want to be assured that he or she is not being swindled. Again, I would question such an arrangement on its face if I were the EB-5 investor in that arrangement.

ESCROW IS NOT REQUIRED

The first point that Regional Centers and EB-5 investors have to recognize is that there is absolutely no legal requirement that an escrow agreement ever be used in EB-5. The escrow agreement was conceived as a marketing tool with the objectives of:

1.) pacifying investors,
2.) locking-in EB-5 funds in a project, and
3.) complying with 8 CFR 204.6(j)(2), which requires that the I-526 petition must be accompanied by evidence that the required amount of capital has been placed "at risk" and actually committed to the project presented in support of the I-526.

ESCROW MAY SLOW THE FLOW OF FUNDS

If a Regional Center has locked its funds in escrow it may suffer because of it. Since escrow is not required, it cannot be the basis for a request for "expedited processing". It is not the government's fault that a project principal made a poor business decision. If too much money is tied up in escrow, an entire project may collapse.

ESCROWED FUNDS AS LEVERAGE

If a project is worthy of foreign investment, then it should also be worthy of domestic investment. A foreign investor who has no other avenue through which he and his family can obtain immigration to the United States, or an extremely long wait in a very long visa queue (like 23 years for a sibling from the Philippines or a ten year wait for an EB-3 from India), may be eager enough to sign-on to a project early in its development. In this case, escrow could be just as valuable or even more valuable to the project principal (the Regional Center) as it is to the foreign investor. If a project is having a hard time locating domestic investors because of a rough patch in the economy, as opposed to a lousy project proposal then having some foreign funds committed may be just what the doctor ordered to induce buy-in from domestic investors. If a loan officer has to decide if the project is worthy of bridge loans in order to get started, having money committed and locked in escrow may become a crucial factor in the equation and thus in the loan officer's final determination.

VARIATIONS IN ESCROW

In order to avoid project collapse, a variety of conditions or triggers could be built into escrow agreements. While most EB-5 escrow agreements tend to have only one condition for release of the funds, i.e. I-526 approval, this is something that is self-imposed. Regional Centers that choose to use escrow should consider the breaking points for the project and set conditions accordingly. Here, the agreements can be as creative as you can imagine.

Not every investor will demand an escrow agreement in the first place. Some will prefer not to bother with it at all. A savvy investor who sees the promise in an investment opportunity may have enough confidence in that project from the very beginning.

In some instances, an investor may bring a project to a Regional Center and offer to freely give the start-up funds immediately without escrow or even having filed an I-526 (or even before the Regional Center has filed an I-924) just to get the Regional Center to accept their concept. Such an investor may bring their own experts on board with business plans and economic analyses.

How about an "early release option"? An agreement could be crafted that would let investors opt to jump the job allocation queue in exchange for early release of funds. They might retain their "first-in, first-out" pecking order just to be offered the option and those that pass could be pushed down the job allocation queue while those that agree would rise to the top. In order to keep the project viable for all, only one or a few might be needed to volunteer to exercise the option. There could also be a "fail-safe" forced early release clause if everybody declined and the project faced imminent collapse. One just needs a good imagination.

CONCLUSION

Before you paint yourself into a corner, make sure it is the ONLY choice. Take a step back and look at the big picture. Then, and only then, put it in writing as cautiously as humanly and legally possible. Good luck.

About The Author

Joseph P. Whalen is not an attorney. He is a former government employee who is familiar with the INA. His education is in Anthroplogy with a concentration in Archaeology and has both a BA (from SUNY Buffalo) and an MA (from San Francisco State University) in Anthroplogogy. He previously worked as an Archaeologist for the U.S. Forest Service before becoming an Adjudicator with INS which became USCIS.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.